Richard Thaler and Cass Sunstein's best-selling book Nudge, published in 2008, is the first book I recommend when people are interested in learning more about behavioral finance, even though little of it deals directly with markets, and even though I vehemently disagree with most of it. I recommend it so highly because its underlying insights into human behavior are true and useful. I disagree with its policy implications because I think it's immoral for government to manipulate decisions people make, even if it does so "benevolently." For years, I've assumed readers would discern that distinction themselves.

But a recent trend has proven me wrong. The followers of Nudge, though to be sure not the authors themselves, have now gone overboard in their rabid enthusiasm for governmental manipulation.

In the book, the authors introduce the science of "choice architecture" or "libertarian paternalism," the idea that decision making can be modified through ostensibly benign and subtle manipulations of people's options. For example, making the default choice for organ donation an "opt-out" versus an "opt-in" drastically raises the portion of donors.

But the authors never claimed that all nudges were good. By its very definition, choice architecture requires an architect, and architects can be flawed. One can be nudged just as easily towards a cliff as towards a pillow.

Yet nudge-niks today have become extremist. They think all nudges by government are good.

The most recent example is New York City Mayor Michael Bloomberg's push to ban what he considers overly large soda cups. It is a quintessential nudge: changing the default choice for the majority of New Yorkers who would otherwise "foolishly" order a larger size but making it easy to circumvent the regulation for those who want to by allowing refills.

But it's not a good nudge. Thaler tweeted his disapproval of the proposal almost immediately.

So now the question becomes: what is a good nudge? If we can't objectively discern good ones from bad ones ahead of time, maybe the entire question of government nudges needs to be uprooted. Maybe there are no good governmental nudges.

The touchstone example of Thaler and Sunstein is the arrangement of food in a cafeteria. If fruits are displayed more prominently and earlier in the line than French fries or fatty meats, people can be nudged towards supposedly healthier eating. Sounds reasonable.

But what if that's wrong, too? What if fatty foods are better for you than fructose and other "healthy" carbs? Could nudges that even the authors of Nudge consider good actually be bad, perhaps deadly?

Let's look at the evidence. Actual nudges predate Nudge, of course, and in the field of nutrition no less. The United States Department of Agriculture has been nudging Americans for generations to eat what the feds consider a healthy diet. The famous food pyramid was ubiquitous from its introduction in 1992 until its replacement last year. It encouraged vast quantities of carbohydrates in meals, and only sparing use of fats and oils.

But contrary to federal opinion, it is not fats that cause obesity, but carbohydrates. Gary Taubes carefully documents the devastating effects of carbohydrates historically, nutritionally, and experimentally in his book Good Calories, Bad Calories.

Obesity in America grew in lockstep with familiarity with the USDA food pyramid. In 1992 when it was introduced, no state had an obesity rate above 20%. Today, more than half of our states do. Obesity reduces life expectancy significantly, so the USDA's nudges towards carbohydrate-heavy diets may have contributed to substantial mortality.

We may have been literally nudged to death.

It is hard to conclusively prove that the food pyramid was the sole cause of the obesity epidemic. But it seems that nudges backfiring is the rule, not the exception.

Mayor Bloomberg has required calorie information posted at restaurants, another classic example of a nudge. Counterintuitively, that seemed to have increased the amount of calories consumed. Of course, Mayor Bloomberg, like all government officials, doesn't see failure as a reason to stop further interventions, but only as motivation to try more. His hand-picked commission is now also examining limits on popcorn and milk shake sizes!

Financial nudges are no different. Excessive regulation created the conditions for the crisis (e.g. encouraging risky subprime mortgages for political purposes and discouraging competition among ratings agencies), so the federal response is: even more new regulatory agencies and more nudges on us.

The new Consumer Financial Protection Bureau will supposedly protect consumers by unilaterally and after-the-fact deciding which loans are "unfair," "deceptive" or "abusive." The new Financial Stability Oversight Council will supposedly protect financial stability by unilaterally deciding what financial firms are "systematically important" and therefore effectively nationalized.

Farewell financial freedom, we hardly knew ye.

What would our world be like if government officials simply didn't have the power to unilaterally affect our decision making, no matter how much they wanted to? What if we had far more libertarianism, and far less paternalism?

Maybe it's time for us to start nudging our government back towards leaving us alone.

Philip Maymin is an assistant professor of finance and risk engineering at NYU-Polytechnic Institute.

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I have to confess to finding at its bottom that the highfalutin "bahavioral economics" is little more than marketing. Perhaps by calling it "behavioral economics" no one will note that it is marketing conducted by the government and policymakers. We used to call that government propaganda and social engineering. And by the way, Thaler and Sunstein misspelled the name of their book. It is properly spelled "Noodge".

Posted by WayneAbernathy | Friday, June 29 2012 at 10:01AM ET

Commenter j.doe raises the issue of regulatory capture in the context of the financial crisis, and the same issue is relevant to the author's discussion of the USDA food pyramid. It would be naive to think that the USDA, in developing a food pyramid that nudged Americans toward consuming more carbohydrates, was driven merely by a desire to improve the health of the populace. Agricultural interests surely had a big impact on the process, as they still do in government health programs. The same is of course true of financial regulation. -- Kevin Wack, Capitol Hill Reporter, American Banker

Posted by kevinwack | Thursday, June 28 2012 at 10:28PM ET

For more info on how regulation caused the crisis, please see our forthcoming paper in Financial Markets and Portfolio Management:
http://ssrn.com/abstract=1587043

Or read the earlier BankThink article we wrote expanding on it:
http://www.americanbanker.com/issues/175_106/vp-experiment-securities-risk-1020284-1.html

Posted by pmaymin | Thursday, June 28 2012 at 3:51PM ET

Ditto to the above two comments. Ideologues are always cherry picking facts to support their beliefs and ignoring what doesn't fit their theory. Govt's fault was never too much regulation, but not enough... thanks to capture of regulatory entities by the regulated.

Also, lets not forget that it wasn't loans to lower credit score people that tanked the economy. It was predatory loans that took advantage of the unsophisticated, it was liar loans, it was bundling, camoflaging and offshoring of risk in exchange for fantastically excessive compensation that incentivized unethical behavior in the private sector and NUDGED the financial system almost over the edge.

Posted by j.doe | Thursday, June 28 2012 at 3:26PM ET

The biggest myth of the sub-prime lending debacle is that it can't all be explained by political and regulatory incentive distortions. The debacle ensued because capital had been depleted as the way to lower borrower costs. Dodd-Frank is more than a nudge, it's a push. Whether it pushes out private lenders and leaves finance to government and risk - more like certain loss - to taxpayers only time will tell .

Posted by kvillani | Thursday, June 28 2012 at 3:24PM ET

I absolutely agree with the 1st comment. CRA had nothing to do with the granting of liar loans, mortgages predicated upon rising home values for investors without sufficient income, or mortgages without any downpayment or something well below 20%.

As for large cups of soda, I see nothing dangerous about forcing big drinkers to go back for a 2nd offering. Something has to be done about obesity and I doubt many obese people know what foods are in it.

Posted by Tom White | Thursday, June 28 2012 at 2:46PM ET

Once again the oft-repeated nonsense that "risky sub-prime mortgages" were encourgaged "for political purposes". Pleaee understand that these mortgages were not agency mortgages and were not originated by CRA regulated banks, but by loosely regulated, greedy mortgage companies, assisted by Wall Street.

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